The NASDAQ Stock Market, Inc. (NASDAQ) has adopted changes to NASD Rule 4350 to permit foreign private issuers1 to follow their home country corporate governance practices rather than certain practices prescribed by Rule 4350 without first seeking an exemption from NASDAQ. These modifications went into effect on March 3, 2005.
Under the prior rule, a foreign private issuer that desired to follow the corporate governance practices of its home country in lieu of those prescribed by Rule 4350 was required to formally request an exemption from NASDAQ. The issuer had to demonstrate that the NASDAQ requirement was contrary to the laws, rules, regulations or generally accepted business practices of the issuer’s home country. In addition, the issuer had to disclose in its annual report filed with the Securities and Exchange Commission the receipt of the NASDAQ exemption and a description of the home country practice, if any, followed by the issuer in lieu of the NASDAQ requirement.
The new rule no longer requires a foreign private issuer to request an individual exemption from NASDAQ but continues to require that the issuer disclose in its annual report (and, in the case of an IPO or first U.S. listing on NASDAQ, in its registration statement) each requirement of Rule 4350 that it does not follow and the home country corporate governance practice it follows instead. In addition, the foreign private issuer must provide NASDAQ with a statement from outside legal counsel in the issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws. The issuer must obtain the certification at the time of its NASDAQ listing or, in the case of an existing issuer, when it seeks to adopt its first “non-compliant” practice. A foreign private issuer that has previously received an exemption from NASDAQ may continue to rely on that exemption unless the requirement to which the exemption applies was changed after the exemption was issued.
However, the new rule does not exempt foreign private issuers from complying with all of the requirements of Rule 4350. Specifically, foreign private issuers are required to maintain an audit committee that has the responsibilities and authority, and establishes the procedures, set forth in Rule 4350(d)(3) and meets the independence criteria of Rule 4350(d)(2)(A)(ii). These requirements go into effect on July 31, 2005. In addition, foreign private issuers must continue to comply with the listing agreement requirement of Rule 4350(j) and the requirement to disclose the receipt of a going concern qualification in an audit opinion under Rule 4350(b)(1)(B). Finally, effective July 31, 2005, foreign private issuers will have to comply with Rule 4350(m), which requires prompt notification to NASDAQ of any material noncompliance with Rule 4350.
NASDAQ’s new rule is similar to the existing related practices of the New York Stock Exchange, Inc. (NYSE) and the American Stock Exchange LLC (AMEX), except that the new rule requires foreign private issuers to disclose “each requirement” of Rule 4350 that they do not follow. The rules of the NYSE and AMEX only require such issuers to disclose “significant ways” in which their corporate governance practices differ.2
1The new rule makes it clear that a foreign issuer that is not a "foreign private issuer" (as defined in 1933 Act Rule 405 and 1934 Act Rule 3B-4) is not eligible for any exception based on its home country's practices.
2In addition, the NYSE does not require disclosure of a going concern qualification in an audit opinion.